Judge rules law firm in the clear

Toronto law firm is off the hook for the alleged negligence of an affiliated counsel to the firm in a $14-million lawsuit over a Ponzi scheme, after a judge ruled it could not be held vicariously liable for his actions.

Davide Amato, a former dentist who lost millions in an investment scheme run by notorious Toronto businessman Robert Mander, accused Aylesworth LLP of breaching its fiduciary duty to him during work performed by Peter Welsh, an Oakville, Ont. lawyer who acted as counsel to Aylesworth and was also Mander’s longtime lawyer.

The action was part of a slew of litigation that followed in the wake of Mander’s suicide in March 2010, when the walls began to close in on his scheme and investors realized the full extent of their losses, estimated at a total of around $40 million.

Welsh denied knowledge of the Ponzi scheme in a statement of defence, and none of the allegations against him have been proven in court, but when he settled with Amato, the former dentist came after Aylesworth, moving for partial summary judgment on the issue of the law firm’s vicarious liability for Welsh’s alleged actions and omissions. However, in her March 4 decision on the summary judgment motion, Ontario Superior Court Justice Darla Wilson sided with Aylesworth: 

“Simply because Welsh was counsel to the firm did not impose on Aylesworth an obligation to supervise all legal work that Welsh was doing,” she wrote. “Looking at the evidence in its totality, I am not persuaded that there was the requisite nexus between the work Welsh performed for Amato and the firm that would justify a finding of vicarious liability.”

Aylesworth, which has since changed its name to Dickinson Wright LLP after combining with a Detroit, Mich.-headquartered firm in 2011, is still not completely in the clear, however, as the case continues against another lawyer sued by Amato: Julia Dublin, a former partner at Aylesworth. She represented Mander during an Ontario Securities Commission investigation into his business.

Amato met with her to discuss legal issues with his company in 2009, and claims she should have warned him about concerns Mander was involved in a Ponzi scheme. However, Aylesworth says neither Dublin nor the firm was ever retained by Amato.

Nevertheless, Aylesworth’s lawyer, Peter Wardle, says he was happy to fend off the summary judgment motion.

“It’s an unusual decision, because it’s rare that [there’s] a vicarious liability claim that involves a counsel relationship between a lawyer and a law firm,” says Wardle, a partner with Toronto litigation firm Wardle Daley Bernstein Bieber LLP. “We were fortunate in this case that the terms of the relationship were set out in writing, which is often not the case. So I think for firms looking at this kind of arrangement, this decision offers some helpful guidance.”  

Toronto litigator Michael Lesage, who is not involved in the case, says Amato’s claim for vicarious liability was an “interesting and creative” attempt to “try to reach the deep pockets” of a Bay Street law firm. 

“There were probably a significant amount of uninsured losses, as it’s likely the lawyer who settled only had $1 million in insurance through LawPRO,” Lesage says.

A note attached to Welsh’s law society profile also notes that his practice is currently restricted due to the licensee’s bankruptcy.

Welsh did not respond to requests for comment, but in a 2010 interview with Law Times soon after Amato’s action was launched, he expressed disbelief that he had become caught up in such a big-money lawsuit after completing a few “mundane” legal tasks for mere hundreds of dollars to do with the corporate structure of Amato’s business. There was no reason for him to suspect the true nature of Mander’s activities, Welsh said.

“It’s hard, if not well nigh impossible, to advise people about something you know nothing about,” he added.

According to Wilson’s decision, it was 2007 when Amato first became involved in the investment scheme with Mander, who referred him to Welsh. The lawyer handled the sale of Amato’s dental practice, and also did legal work for the company Amato set up to funnel money into Mander’s scheme, Wilson wrote. 
Amato claimed Welsh held himself out as a member of Aylesworth, and that his connection with a prestigious Bay Street law firm lent Mander’s entire scheme an air of credibility.

While Welsh did have a firm e-mail address and profile on the Aylesworth web site identifying him as counsel, the firm argued that it was clear Amato had hired Welsh alone in his capacity as a sole practitioner, and there was no connection between Amato and Aylesworth.

“Even if Welsh exaggerated his relationship with Aylesworth to Amato, there is no evidence that Aylesworth held Welsh out as a member of their firm to Amato,” Wilson wrote, adding that Amato’s assertion that he thought he had hired Aylesworth “is not what could be described as a reasonable belief.”

An agreement between Welsh and Aylesworth governed their relationship between 2000 and 2010, providing for his use of firm letterhead and terms of remuneration when he was doing counsel work for the firm. Welsh also had a similar agreement with a Burlington, Ont. law firm, but all other work flowed through his own practice.

In their dealings, Welsh and Amato always met at the lawyer’s Oakville office, while correspondence and bills were always delivered using his personal letterhead. According to Wilson’s ruling, Welsh only ever opened a file concerning Amato at Aylesworth when the firm’s trust account was used to briefly hold the funds of his dental practice sale, but no work was done by anyone at Aylesworth.

Wilson found Welsh’s relationship to Aylesworth was more “akin to that of an independent contractor than an employee,” and that there was no evidence to support the claim that Welsh was working for Amato in his capacity as counsel to Aylesworth.

“The firm had no involvement or control over Welsh’s sole practice; they had no information about the work that he was doing as a sole practitioner,” Wilson wrote.

Lesage says the case is an important one considering the popularity of counsel and referral agreements between law firms and external lawyers.

“Lots of lawyers and law firms are interested because it can be win-win for both sides. I don’t see that slowing down,” he says.

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